A careful reading of the Twitter prospectus shows that insiders have been making moves to minimize investment and estate taxes before the IPO.

Twitter's elite aren't just planning the firm's initial public offering. They are protecting their estates.

The social-networking company's chairman, Jack Dorsey, is 36 years old, while Evan Williams, the largest individual shareholder, is 41, and Chief Executive Richard Costolo is 49. All three men have been making canny estate-planning moves, according to information from the IPO documents.

The moves could save Messrs. Dorsey, Williams and Costolo a total of at least $115 million, and perhaps far more, in federal estate tax at current rates, assuming a Twitter offering price of at least $28 a share. The current top federal estate-tax rate is 40%, and Twitter's home state of California has no state estate tax.

ENLARGE

Twitter insiders, who made estate-tax moves before the highly-anticipated IPO, could save at least $115 million in federal estate tax.
Shaw Neilsen

Those projected savings are less than the estimated $200 million skirted by six FacebookFB-1.26% insiders who made estate-tax moves before last year's stock sale. Still, they help show how careful planning can benefit the truly wealthy—people with assets far in excess of the estate- and gift-tax exemption of $5.25 million per individual, or $10.5 million per couple.

"The trick is to transfer assets when they aren't worth a lot, so that when they are, you don't have to pay a tax of 40% or more for the privilege of leaving it to heirs," says Andrew Katzenstein, an estate-planning expert at law firm Proskauer Rose in Los Angeles who has advised Internet entrepreneurs.

Messrs. Dorsey, Williams and Costolo didn't respond to requests for comment. Estate planners say they feel comfortable interpreting the insiders' moves based on the language in the offering documents and their knowledge of the terrain. Here are the techniques—and how each one works.

Grantor-retained annuity trusts.

According to the IPO filing, Mr. Dorsey holds 2.4 million of his 23.4 million Twitter shares in an "annuity trust." Mr. Williams and his spouse hold 8.9 million of their total 56.9 million shares in five separate annuity trusts.

John Ramsbacher, a lawyer at Ramsbacher Prokey, a San Jose, Calif., firm specializing in pre-IPO planning, believes the trusts are grantor-retained annuity trusts. Other experts agree.

In essence, GRATs are used to transfer asset appreciation from one taxpayer to another, virtually tax-free. The owner of the assets—in this case, pre-IPO Twitter shares—contributes them to the GRAT before the asset surges in value.

While the trust exists, the owner receives annual payments adding up to the value of the original contribution plus a return based on an interest rate set by the Internal Revenue Service. In the past few years, the rate has been low, around 2%.

At the end of the trust's term—which the owner must outlive for the GRAT to work—the owner has an amount equal to the value of what he put into the trust, but most of the asset's growth is out of his possession. Often, it then goes into a trust for relatives, which can include unborn children.

All of the Twitter annuity trusts bear a date of 2010, when Twitter's stock value was less than $2, according to Christopher Austin, a securities lawyer at Goodwin Procter in New York. Assuming an offering price of at least $28 a share and a GRAT term of five years, the estate-tax savings from the GRATs listed in the Twitter filings could come to at least $113 million, Mr. Ramsbacher says, and possibly much more.

Gift trusts.

According to the filing, 564,000 of Mr. Williams's Twitter shares are in something called the Green Monster Trust, dated November 2012. (That might mean he is a Boston Red Sox fan.)

Options for another 273,000 Twitter shares are in the Lorin Costolo 2012 Gift Trust; Ms. Costolo is the wife of the Twitter CEO.

The experts say these trusts probably were set up to take advantage of 2012's estate- and gift-tax regime, because it was feared that the 2013 regime would be far less generous. Last year the gift-tax exemption was $5.12 million, and the value of Mr. Williams's shares at the time he funded the Green Monster Trust was about $10 million, or the value of his and his wife's combined exemptions.

Ms. Costolo's trust was funded with about $5 million of stock that Mr. Costolo gave her, according to the filing. "His gift enabled her to use her exemption to move the appreciation on that stock out of their estate," Mr. Katzenstein says. A carefully drawn trust sited in a state such as Delaware or Nevada can be exempt from transfer taxes on all descendants as well, he adds.

It is hard to estimate the total estate-tax savings from these trusts, but a conservative estimate is more than $3 million, Mr. Katzenstein says.

Single-member limited liability companies.

Among the interesting disclosures in the Twitter filing is a footnote saying that Mr. Williams holds 44.3 million Twitter shares in a single-member limited liability company called Obvious LLC.

For example, says Mr. Ramsbacher, if Mr. Williams simply gave $1 million worth of Twitter shares to his children, the transfer could incur gift taxes of $400,000.

But if the shares are in his LLC and he gives them an interest in that, the gift might be worth only $650,000, with taxes of $260,000. That is because the LLC shares aren't easily traded and the recipient doesn't control the LLC.

In addition, Mr. Ramsbacher says, the Green Monster Trust could use a promissory note to buy discounted interests in the LLC. That would put even more Twitter stock into the trust at less than market value, further minimizing gift taxes. In some cases, the only cash payment required for years is the annual interest on the note, he adds.

However, all these tax-saving moves come at a price—besides hefty professional fees. Asset owners who minimize gift or estate taxes often lose out on capital-gains-tax forgiveness at death. (Experts call this the "step-up.") That's a bigger consideration now that the combined top federal and state tax rate on long-term gains is 37% or more in California, although people as young as Twitter's elite won't find the decision difficult.

Saving gift and estate taxes often means giving up some control or use of an asset, even if it will benefit heirs. That is why Mr. Ramsbacher advises using these techniques with a small percentage of total assets, "the ones people know they won't need."

Another thing to always consider is donating. Our company recently replaced all of our computers and we donated the older ones to http://www.charityboats.org/boat-taxdeduction.html. Obviously, they accept more than just boats at their organization. It was free, very simple, and they even came and picked them up. Besides the good deed of donating to charity, we got a significant tax deduction.

Experts navigate the rules to maximize profit, that makes perfect sense. Maybe you shop in a neighboring state to save sales tax or pick up some prescription drugs abroad? If the rules are unfair the government can change them. But that probably means the experts will just shift tactics. If in 2010 twitter stock was really worth $2.00 and today it is worth $28, who can argue? But were they really worth less than $2.00 three years ago? Are they really worth $28 today? Private companies have a lot of discretion in valuations and use that discretion to both attract employees and avoid taxes. Probably the people getting rich at Twitter will still end up paying a lot of taxes, spend a lot of money on new houses and cars, hire people to take care of their children and day to day affairs, and maybe give some of it away to charity and maybe even invest in the next Twitter.

Jack Dorsey, Evan Williams and Richard Costolo will have insignificant estates to protect if they're imprisoned for selling phoney demographics about and useless advertising to non-existent account holders, even if they can't sell stock on Twitter after Expert Trading Community options broker ChiefHuntingBear publicized in the Wall Street Journal how he figured out they're running a Ponzi Scheme.

I assume that all of these people are US citizens. Otherwise there would be simpler ways to minimize their tax burdens. The many non-citizens who come to Silicon Valley who find themselves in this fortunate position would be well advised to find their way to an international office of a potentially successful company in the pre-IPO stage.

Good for these folks, very smart planning. At the time they set these plans in place, they had no idea if twitter would be successful or not, and who knows, maybe it won't be successful as a public company. Does anyone remember myspace.com?

All press is good press on Wall Street... to make money on Twitter, buy GSVC, which holds a large portion of its portfolio in TWTR, plus many other stars. It is moving up on Twitter news like a bolt of lightning, presently at 15, headed sovereignly to 20. BUY GSVC! Make 33% in far less time than it takes to circle the sun.

Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.

Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934).

Billings Learned Hand (January 27, 1872 – August 18, 1961), usually called simply Learned Hand, was a famed American judge and an avid supporter of free speech, though he is most remembered for applying economic reasoning to American tort law.

Nothing worse than liberal hypocrisy. Why isn't Warren Buffett and Bill Gates leaving their entire fortunes to the US government? What because the billions they took a lifetime to make would be gone in a matter of days?

How about we get rid of the estate tax. Most americans think the tax is unfair and it is. Nothing like working and saving your whole life while paying taxes on all you earn, then the govt steps in and takes 40% just because you happen to die.

IIRC, it was also the twitter liberals who browbeat San Francisco into reducing their company's city tax burden.

For liberals, high taxes and regulation should always be imposed on the *other* guy, never themselves, particularly if the other guy is a small-medium business or middle class. Warren Buffet is the exemplar of this tactic, which also curries favor w/ Obama.

The progressive Dems know there is not enough money among the "rich" (ie, any income above 200K) to support their socialist agenda and they've already started to soak the middle class, especially thru Obamacare. But pillorying the "rich" distracts the Occupy mobs and their ilk.

So an adult child of rich person should be able to get tax free money? That person should pay less in taxes than the person that comes to work everyday (labor) or invests his money ( capital)? Taxes are necessary evil. If anything, inheritance taxes should be much higher than income or capital gains taxes.

Do you not know how to read and comprehend. I am fully aware that Gates and Buffett plan on giving away substantially all of their wealth to charity. But both these men have suggested their taxes were NOT high enough. Well, if you feel you were undertaxed why not give a big chunk of your estate to the US government if you believe enough in government that you would give Obama the argument for why taxes should go up on everybody; not just the so-called rich.

That is the hypocrisy.... if you want to take a stand and say the US doesn't tax its people enough then put up some of your estate to make up for all the taxes you felt should have been paid.

Your problem is you don't think deeper about the issues and you don't carefully read before you who knee-jerked put yourself out there as ill-informed and failing to respond to the central issue of the article which is liberals trying to shelter their income or wealth from taxes on the one hand and then talk about how the government is doing all this good and needs more taxes. Well half this nation did not vote for Obama's brand of socialism and half this nation doesn't think government is worth much beyond the amount of powder it would take to blow them to hell. I assume if that sentence is allowed to stand then NSA will be showing up on my door step and perhaps arrest me for treasonous statements about the government.

It's not tax free. Taxes were paid on it already. What you want is for the adult child of a rich person to pay taxes again on money that was already taxed once. Besides, it's none of the government's business what I give my kids. Do you ask the government to come collect additional taxes on any toys you give your kids for their birthday? Those toys are a transfer of your wealth to them.

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